Should Climate Risks Be Included in Sustainability Reports?

Ed Note: to hear more on this issues consider taking our GRI-certified course in sustainability reporting – next week in Mountain View! Author Emilie Mazzacurati will be a guest speaker.

Historically, sustainability reporting has been largely about the firm’s impact on society and the environment. Is the firm using up a lot of resources? Polluting? How does it impact local communities’ lives and livelihoods? How does it treat its employees? And so much more. Recently though, stakeholders have also been asking for disclosure on risks and opportunities related to climate change. Are the firm’s operations at risk for a Category 5 hurricane? Will its supply chain be impacted by more frequent floods in Bangladesh? How will the firm procure water or agricultural goods in a dryer world? How will it pay for shipping in a world with high carbon prices? It could be argued that including climate change impacts into sustainability reports turns sustainability reporting on its head: when a firm reports on the impact climate change may have on its operations, supply chain or business model, it is really reporting on the impact of the environment on the firm, not the other way round. So, should climate risks be included in sustainability reports?

Climate risk disclosure still lagging

Recent trends in climate risk disclosure seem to support the view that climate risks don’t belong in sustainability reports: the Center for Energy and Environmental Solutions (C2ES) recently released a comprehensive report on Weathering the Storm: Building Business Resilience to Climate Change. They compared S&P 100 companies’ responses to Carbon Disclosure Project questionnaires to their sustainability reports, and found that 85 out of 100 S&P companies listed potential impacts from climate change on their company in their CDP questionnaire, but only 35 of these also mentioned those impacts in their sustainability reports. The top five potential impacts listed by companies were disruption in production capacity (57 percent), increased operational costs (47 percent), inability to do business, increased capital costs and reduced demand for goods and services (less than 15 percent for the last three).

Is climate change a material issue?

It might also be that the fifty S&P 100 companies that listed climate risks in their CDP questionnaire but not in their sustainability reports decided that climate risk was not material – yet. And that’s a valid argument: the CDP questionnaire is an excellent place to discuss all and any research and analysis related to climate risks specifically, while the GRI asks companies to focus on material issues – issues that “reflect the organization’s significant economic, environmental and social impacts,” or that “substantively influence the assessments and decisions of stakeholders.” Yet the fact is, we’re still lacking granular data on how climate change will impact temperature, hydrology and sea-level rise in many places around the world, and the actual magnitude and timescale of the impacts of climate change are still uncertain. This means many companies are simply not in a position to assess whether or how their operations or supply chain will be impacted. So for many companies, climate risk disclosure involves saying things like “we anticipate there could be impacts, but we don’t know for sure or we don’t know how bad it will be.” That makes it hard to tell if those issues are material.

GRI requires reporting of climate risks and opportunities

Even in this context of uncertainty, many companies should include more information on climate risk. The Global Reporting Initiative Framework contains several indicators specifically focused on climate change. Some of these indicators are widely used, such as EN 16-17 (EN 15-19 in the G4) on GHG emissions. Yet there’s another lesser-known indicator, EC-2, that solicits input on “the financial implications and other risks and opportunities for the organization’s activities due to climate change.” As the G4 is putting added emphasis on supply chains, this indicator is going to become all the more relevant for companies with suppliers in vulnerable countries [link ND-Gain] around the world. The range of potential impacts is large – and while not all sectors or companies will be impacted, many firms that may not be thinking about climate change today will see dramatic impacts. This makes climate risks material for many companies, even with missing data and uncertain impacts: whether or not the company’s management is actively assessing what the impacts of climate change will be on the business is a material issue – at least until proven that the firm won’t be affected.

Investors are stakeholders, too

One group of investors has been particularly vocal regarding climate disclosure: investors. Theoretically, publicly-traded companies are already required to disclose their climate risk exposure in their financial filings, Form 10-K. The Securities and Exchange Commission (SEC) outlined in their 2010 guidance what companies were supposed to include – regulatory risks, risks related to the physical impacts of climate change, and indirect risks to supply chain and market conditions. In reality, though, few companies even mention climate change in their 10-K form – only a third of S&P 100 companies do, according to that same C2ES report. Ceres and the Investor Network on Climate Risks (INCR) wrote to the SEC earlier this summer to request the regulatory agency “devote greater attention” to what was clearly a material issue for investors, climate change. General guidance on how to report climate-related risks and opportunities is now available – the Climate Disclosure Standard Board has released a detailed Climate Reporting Framework with specific language and advice on what to include, and the Sustainability Accounting Standards Board is in the process of developing detailed, sectoral sustainability disclosure standards which will include sector-relevant key performance indicators for climate change.

How to assess climate exposure?

The hard work that remains for the vast majority of businesses, S&P 100 and beyond, is to adequately assess, quantify, and manage climate risks. Pulling together the adequate data, scientific literature, and cross-referencing it with a company’s current operations and long-term strategy to identify the most salient issues can be a daunting work – but for many companies there will be a silver lining in the form of new business opportunities, reduced operational costs or increased resiliency to risks across the board. How is your company dealing with climate change? Have you identified risks and opportunities? Tell us more in the Comments section.